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Segmentation, Targeting,
Positioning in Financial
Services Markets
Athens University of Economics and Business
Paulina Papastathopoulou, Ph.D. Lecturer in Marketing Department of Marketing and Communications
Defining market segmentation
Market segmentation is the process of viewing a
heterogeneous market (i.e., a market
characterised by divergent demand) as consisting
of a number of smaller and more homogeneous
parts, called segments (Harrison, 2002)
In its ultimate form, market segmentation results in
each customer being served differently, i.e.,
individual marketing
However, due to its high-cost, individual marketing
rarely is the case in consumer markets
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How a market looks like, before segmentation
How a market looks like, after segmentation
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The influence of culture on the market of personal financial services
Culture refers to a set of values, ideas, artifacts and other meaningful symbols that help individuals communicate, interpret and evaluate as members of society (Engel, Blackwell and Miniard, 1995) Financial institutions that expand their operations abroad must be aware of the impact of some sensitive cultures on the demand for financial services Islam does not allow interest Chinese people in their 50’s avoid buying life insurance as they consider it a sign of bad lack
The effect on financial institutions that fail to segment the market
Customers with different requirements are being approached with the same financial service, the same pricing, a standardised communications policy and an inflexible service delivery process
Customer satisfaction decreases sharply
Customer retention becomes harder
New customer acquisition rates decline
The market perceives the financial institution as having either a product orientation or a production orientation, not a market orientation
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What are the benefits of financial services market segmentation (I)
It operationalises the concept that a company cannot be all things to all people (i.e., the “blanket” approach) By excluding certain segments, a financial institution focuses its efforts and resources on a narrower target and gains deep knowledge of the needs of that target It drives costs down, by enabling a closer match of corporate resources with a segment’s requirements In enhances customer satisfaction by addressing customer requirements more accurately
What are the benefits of financial services market segmentation (II)
It enhances customer retention, since target segments see that they are being valued by a financial institution
It increases the odds of target segments perceiving the financial institution as a brand
It enables the financial institution to foresee changes in the buying behaviour of the target market and to respond timely with new offerings
It enables the financial institution to detect target segments, which are small in size but have large potential, i.e., niche segments
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Geography as a basis for segmentation
Historically geography has been a useful segmentation basis for companies unable (due to lack of logistical infrastructure) to serve an entire area Regional segmentation Continents, Countries, Cities, Regions in a city Size of population Under 15.000, 15.001-40.000, over 40. Density segmentation Urban, suburban, rural
Demographics as a basis for segmentation (I)
Demographics offer a straightforward basis for
segmentation because they are based on easy to
access information and produce classifications
which are
Straightforward
Easily interpretable
Measurable
Very useful from a marketing viewpoint
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Demographics as a basis for segmentation (II)
Gender Traditionally men were the target segment of financial institutions, while women were viewed as feeling much less confident with financial services Recent societal developments (e.g., the demise of the nuclear family, the career-seeking woman) have made women more knowledgeable of financial services However, gender-based segmentation is always useful for financial services marketers in order to adapt their communications policy to the degree to which the genders understand the complex nature of financial services
Demographics as a basis for segmentation (III)
Age. Individuals with similar age may exhibit similar
buying behaviour and may have similar needs for
financial services
School children
They have pocket money, they receive monetary gifts and they tend to save. So,
- They may require special savings accounts, accompanied, for example by a gift
- Financial institutions targeting school children are perceived as offering an important lesson, by teaching them about the benefits of saving
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Demographics as a basis for segmentation (VI)
Family life cycle. While age as a basis for market
segmentation enables financial institutions to
target specific age groups, a life cycle approach
enables financial institutions to develop a long-
term relationship with their customers, as the latter
move towards more mature segments. Age-based
segmentation aims at developing ad-hoc
relationships, while life cycle-based segmentation
creates lifetime relationships, thus enabling
customer retention.
Demographics as a basis for segmentation (VII)
Single Young Newly married young couples Divorced without children Full nest 1 Arrival of the 1 st^ child Full nest 2 Youngest child is no less than 6 years of age All children are still financially dependent on their family Full nest 3 Children are leaving school or are entering university, some may work on a part-time basis
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Demographics as a basis for segmentation (VIII)
Divorced with children
Empty nest 1
Children have left home and they are financially independent Parents’ disposable income increases notably
Empty nest 2
One member of the household retires Income falls
Older single people
Socio-economic data as a basis for segmentation (I)
Social class. Social class is a measurement of the type of a person’s educational background and occupation In financial services market segmentation, social class offers discriminatory power Lower social classes tend to have a spending aspiration Lower social classes tend to favour easy-to understand financial services Lower social classes tend to favour bank accounts that are accompanied by some tangible evidence (e.g., cheque-books) Lower social classes tend to favour investments that can be easily turned into cash
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Socio-economic data as a basis for
segmentation (III)
Income. In many societies income is not necessarily positively correlated with social class, so it represents a basis for financial services market segmentation by itself Resulting segments could be: Segment of very low income Segment of low income Segment of middle income Segment of high income Segment of affluent Segment of pseudo-affluent (people who want to behave like affluent but who are not affluent) Financial services marketers should be careful in making a distinction between disposable and discretionary income
Geodemographics as a basis for segmentation
Geodemographic market segmentation makes a
combined use of geographic and demographic
and economic criteria in order to identify segments
with different needs and wants
It is a response to the inadequacies of uni-variate
market segmentation
McKechnie and Harrison (1995) 27
K Better-off retirement areas
J Affluent suburban housing
I High status non-family areas
H Mixed inner metropolitan areas
G Council estates-category III
F Council estates-category II
E Council estates-category I
D Older terraced housing
C Older housing of intermediate status
B Modern family housing, higher incomes
A Agricultural areas
A Classification of Residential Neighbourhoods (ACORN): Combined use of Geographic and Socio-economic Criteria
Psychographics as a basis for segmentation (I)
Psychographics refer to internal characteristics of individuals, such as attitudes, beliefs, preferences, knowledge, personality, interests Attitude segmentation Segmentation based on awareness, knowledge and understanding Since financial services are largely intangible, this poses problems to marketers, who cannot display them and to customers, who cannot have visual pre-purchase information (so they have to rely on their past knowledge and experiences)
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Perceived Knowledge
Financial maturity
H
L
L H
Cautious investors •Very active financially •Have a tendency towards lower risk savings and investment products •Not heavy users of credit cards, they pay the balance in full
Capital accumulators •They are the most financially active segment •The most frequent and heaviest savers •They are frequent users of credit cards
Apathetic minimalists •Average users of financial services •They are likely to have shares •They tend to trust financial advisers
Financially confused •They are the least financially active segment •They never tend to save •They do not tend to use credit cards and if they use them, they pay the balance in instalments, not in full
Psychographic segmentation based on perceived knowledge and financial maturity (complexity of the financial service and associated risk) (Harrison, 1997)
Corporate market segmentation (I)
Corporate customers of financial services differ from personal customers in their structure and characteristics Corporate customers are smaller in number but larger in size They have more complex needs for financial services They have a much more complete understanding of their financial service-related needs (so financial institutions have to deal with highly knowledgeable corporate customers)
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Corporate market segmentation (II)
They often require custom-made financial services
They often exert significant influence on the terms
and conditions of financial services
The demand for corporate financial services is
influenced by the state of the economy, to a much
greater extent than the demand for personal
financial services
A. Age, social class, personality, position in the organisation
Buyer’s personal characteristics
Adapted from Shapiro and Bonoma (1984)
A. Urgency of financial needs B. Amount of money involved
Situations factors
A. Purchasing power structures B. Buyer-seller relationships C. Purchasing policies and criteria
Purchasing profile
A. Company technology B. product and brand use status
Operating variables
A. Industry sector B. Company size C. Company location
Demographic and Geographic information
Criterion Resulting segments
Criteria for segmenting corporate markets for
financial services
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Prerequisites for good market segmentation (III)
Two different segments must exhibit
maximum within-segment homogeneity and minimum across-segment homogeneity
A segment must exhibit at least medium-term stability
in order for the financial institution to have enough
time to develop and implement marketing
programmes
Segmentation process
Identify segmentation criteria
Conduct market research
Apply cluster analysis (advanced statistical
technique –e.g. use of SPSS, Statistica
software packages)
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Strategies for targeting: how many and which segments to target? (I)
Single-segment concentration Total marketing effort is concentrated on only one market segment A financial institution selects this strategy When it has limited resources or Because it is the only segments whose needs can be currently met, given the capabilities of the financial institution It is a feasible strategy for financial institutions serving the corporate or the private market It is a not (usually) a wise choice for financial institutions that serve retail markets It entails, anyway, a risk from putting all eggs in one basket Its greatest benefit is that it gives financial institutions the opportunity to fully understand and meet the requirements of the segment, thus leading to higher customer loyalty
Strategies for targeting: how many and which segments to target? (II)
Multi-segment coverage (selective specialisation)
Marketing effort is spread to more than one
segments
A financial institution chooses this strategy
as a result of the diversity of its range of financial services in order to spread risk
